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3 Things That Your Robo-Advisor Will Never Tell You - Outside View by PersonalFN

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3 Things That Your Robo-Advisor Will Never Tell You
Apr 20, 2017

The millennials are tech savvy.

Therefore, any business that wishes to service and retain their loyalties are increasing its digital presence.

The financial industry is not immune to this trend; rather it's a step ahead. It is on the cusp of seeing the magnificent growth of robo-advisory platforms.

Does that mean investors will soon stop seeking advice from human advisors?

Not really, but the acceptability of robo-advisors is growing at a jaw-dropping pace.

And as you know, there's a tipping point when...

Something gains popularity, turns into a trend, craze, and acts like a magnet.

Robo-advisory platforms are attracting people because they offer you immense convenience. Besides that, they offer you advice almost instantly. They track your investments more efficiently, and generate automated rebalancing signals for you.

Of course, these are distinct advantages of investing through robo-advisory platforms.

But before you form any opinion about them, think about this...

Conviction is one and transparency is another.

Without any doubt, robo-advisors make your life easy, but that doesn't conclude they will be transparent and more competent than human investment advisors.

Don't forget, machines have no cognitive abilities. It's the human being who feeds them. And the quality of the output depends on the quality of inputs. In this context, robo-advisors don't know how to make money for you and safeguard your capital.

Their recommendations are nothing but programmed responses to the investors' most common queries. So, if the "programmer" (the platform launching the robo-advisory) is corrupt, the quality of advice will be poor.

Let's understand this in detail...

The boom in robo-advisory is attracting many fin-tech start-ups as well as some old distribution houses and professionals. As a result, soon there would be a tsunami of robo-advisory platforms. But the question is how many of them would work in your interest?

The answer lies in who's promoting them.

Typically, a fin-tech start-up promoted by a few brilliant tech-savvy grads may be technologically unparalleled. But the promoters have little or zero knowledge about financial markets and about mutual funds in particular, you may not get sound advice; although there wouldn't be any intent to cheat you.

You may simply call these types of robo-advisors genuine but incompetent.

On the other extreme, there will be unscrupulous money-minded distributors turned robo-advisors. They typically design their platforms in such a way that you get hooked onto it with the functional ease offered to you while transacting. But, they would rob indeed.

These two types of platforms put together have demerits as given below:

  1. They don't promote direct plans: Robo advisory platforms launched by commission-driven promoters will be absolutely silent on the benefits of investing through direct plans. In the long run, direct plans save you a good deal of money, and if reducing costs isn't a prerogative, you will end up compromising on your returns. When an investor invests through robo-advisory platforms that promote specifically regular plans, he/she has to bear the higher expense ratio on each scheme he/she invests in.

  2. Offer not the best mutual fund scheme and recommend unwarranted portfolio churning thereafter (so that they earn commissions): This is an extended version of the myopic approach the promoters of some robo-advisory platforms adopted. When the primary source of revenue generation is "commissions", a robo advisory company will try to maximise commission income through all means.

    Generally, such platforms will recommend schemes that earn them good commissions and/or encourage churning your portfolio frequently, so that they can keep earning commissions each time you buy. Their priority will never be your financial wellbeing.

    Moreover, such platforms don't follow any research process to select mutual fund schemes.

  3. Lack emotions to understand your financial health, circumstances, goals, etc.: As robo advisors don't possess cognitive abilities, they would fail to give you the right advice on many occasions, especially when your situation is unique, and there is no "programmed response" to resolve it. You will face this problem with the robo-advisory platforms promoted by people having no background in financial planning. If you try to acquire a comprehensive financial plan through a robo advisor, you'd realise that most of them disappoint you.

What type of robo-advisory platform do you need?

As you must have understood by now, many platforms offering you robo-advisory services are at the extremes. You should avoid them. You need a platform that provides hybrid solutions. This means, your investments are handled by a platform supported by sound research; and if necessary, you would have a flesh-and-blood advisor or a financial guardian who is always available for your assistance.

Hopefully, there will be more worthy robo-advisory platforms launched in future.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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1 Responses to "3 Things That Your Robo-Advisor Will Never Tell You"

Sukanth David Lakshmalla

Apr 21, 2017

The article makes a point on not relying purely on Robo Advisory services which is fair. I think one should try to get a balance between getting the necessary information needed for taking an informed decision from all sources of information which could include Robo advisory platforms. One should not trust blindly anyone, no matter how much experience one has in this field and rely on doing their own research to validate all the information coming from different sources before taking a final plunge. Ultimately it is you who needs to either enjoy the benefits of your decision or get burned in the processes. We cannot go blaming any service provider, weather Robo or Individual, for the results one gets out of the markets. We should understand that market has a mind of its own and no one can accurately read it no matter how much research one puts into it. So we should get inputs from all the sources and take steps based on individual convictions and enjoy the fruits of such conviction and commitment to stay with the stock you believe in with regular monitoring to make sure that the reasons you first invested in the stock still hold firm and you are sailing in the right direction and in the right conditions. What I mean to say is "Sabka sunn-na Apna karna" which means listen to everyone but do your own thing.

Equitymaster requests your view! Post a comment on "3 Things That Your Robo-Advisor Will Never Tell You". Click here!

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Jul 18, 2018 03:37 PM